The Importance of Being a Contrarian Advisor

Part of being a Contrarian Portfolio Manager is looking for opportunity where investors are forming a consensus. Remember, a consensus is usually correct for a short period of time and then very wrong.

There appears to be a consensus forming that world economic growth, which has been slowing since 2011, will be even lower in the near future than it is now.

The impact of slowing world economic growth can be seen directly in Canada. The selling price of Canada’s natural resources, not just oil, but every ore, including copper, iron, and zinc, has been falling since 2011. One of the reasons that they have been falling is the massive inventory buildup of these ores in China as the Chinese stimulated their economy 2009. The Chinese government released billions of yuan to its businesses (a fiscal stimulus) and those businesses used this money to buy raw materials, driving up prices until 2011, when the Chinese stopped buying because the world slowed down their purchase of Chinese goods. Prices of these raw materials have been falling since.

But it is now starting to look like the world economy is at a turning point – upwards.

The primary reason is because of cheap oil but there is also a combination of other factors.

Melissa Shin wrote about this in an article on March 14, 2016:

Tyler Mordy, president and CIO of Forstrong Global was quoted that the world is burning 34 billion barrels of oil each year. Mordy says the US$70 price fall since August 2014 will redistribute more than US$2 trillion annually to oil consumers. “To put that in perspective, that’s a bigger income boost than the combined U.S. and Chinese fiscal stimulus in 2009,” he says.

Now also remember, China, Japan and Europe also have been cutting interest rates and taking other measures (monetary stimulus) to boost their economies separate from the fall in oil prices. There is always a lag between a stimulus measure and the actual turn in an economy. To complicate matters further, stock and bond markets move about six months before the turn in the economy in anticipation of better news.

So, what if, and it still is an “if”, all these measures were to take hold in late 2016 and the world economy started to improve? What would be the effect on Canada?

The first thing one would see is the Canadian dollar rising as world investors started to purchase stock in some of our beaten down mineral and oil companies. To make the purchase they have to first buy Canadian dollars. Because the Canadian dollar is so thinly traded it would not take much to move the dollar up.

Then the big Canadian bank stocks would start to recover as the larger world players wanted participation in a meaningful manner. The best way to buy into Canada with any significant amount of money is to buy Canadian banks.

So what about timing? That is the real question. I might be early with this, meaning that we could have an initial surge and then a pullback but it is inevitable that the world economy will eventually turn up. Stay tuned for further updates.

This article was prepared solely by Larry Short who is a registered representative of HollisWealth®, a division of Industrial Alliance Securities Inc. (iA Securities), a member of the Canadian Investor Protection Fund (CIPF) and the Investment Industry Regulatory Organization of Canada (IIROC).The views and opinions, including any recommendations, expressed in this article are those of Larry Short alone and not those of HollisWealth®

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HollisWealth® is a division of Industrial Alliance Securities Inc. (iA Securities), a member of the Canadian Investor Protection Fund (CIPF) and the Investment Industry Regulatory Organization of Canada (IIROC). iA Securities is a trade name and business name under which Industrial Alliance Securities Inc. operates. This information has been prepared by Larry Short, Portfolio Manager for HollisWealth®, a division of iA Securities, and does not necessarily reflect the opinion of iA Securities. The information contained in this document comes from sources we believe to be reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces where he is registered. For more information about HollisWealth®, please consult the official website at . ShortFinancial is a personal trade name of Larry Short.

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